If what politicians say about the effects of foreign investment were true, we would become Germany in just a few years. The main argument – that foreign investors should be subsidized because they bring new knowledge and technologies to Serbia – in practice proved to be hollow from all sides.
Since 2006, there has been a program in Serbia to attract foreign direct investments by paying subsidies for every job created in that way. Although there is still no official analysis of the effects of this policy, politicians (primarily those who were in power or those who still are) point out that this is a great policy.
For example, former Minister of Economy Mladjan Dinkic stated that every dinar paid as a subsidy is returned to the budget seven times through the payment of taxes and contributions. If this statement is true, then we should direct all the money from the budget into subsidies for foreign investments, since we would become Germany in just a few years.
The statement is meaningless for another reason: most of these companies are exempt from paying income tax, employee salaries and social security contributions for a number of years after starting work. Therefore, the budget cannot have a sevenfold benefit, because at least for some time there is no income from these projects.
On the other hand, most economists criticize these subsidies. Criticisms are mostly related to the issue of efficiency: money is taken from entrepreneurs through taxes who know how to manage it, and then given to others. These can often be companies that are in competition with already existing domestic companies.
There is also the issue of fairness: these subsidies are direct transfers from us taxpayers, to the owners of these companies, and it seems to me that the average resident of Serbia is somewhat poorer than the owner of a multinational company. That makes this policy superhick (Super Hick is a character from Alan Ford’s comic book who is anti-Robin Hood, because he steals from the poor and gives to the rich).
The media reported on cases in which certain companies that received subsidies shut down production overnight and disappeared, not fulfilling their part of the contract after receiving the funds. The texts also stated that there was no serious control of companies that received subsidies in terms of how much they actually hired workers and for how long – whether workers were hired only during the subsidies, or even after.
What are the arguments for subsidies?
But there is one argument that some economic experts mention when they want to justify giving subsidies for investments. It is the transfer of knowledge and technology. What is the basic idea in this case? In a certain economy that has comparative advantages for some production, investments will not happen automatically. In order for investors to be interested, certain preconditions are needed.
These are specialized knowledge of how a given industry works, from how to operate machines and tools in production to softer knowledge of managing large complex systems in the industry. Knowledge is needed in the selection and procurement of materials, quality control, management of logistics and sales channels, etc. The subsidy serves to cover these initially higher costs for the investor, who has to create the entire knowledge and technology transfer system himself.
Is there a transfer of knowledge in Serbia?
To see if subsidy programs for foreign investment in Serbia made sense, we should see if, and to what extent, there was knowledge transfer. Take here, for example, subsidies for the automotive industry, most of which involved funds for Fiat’s factory in Kragujevac and its subcontractors.
The total amount of subsidies paid directly to this company or indirectly through waiving the collection of various taxes (on profits, property, taxes and contributions to employees’ salaries), giving property (land and buildings) and taking over the state’s obligation to build a highway branch from Batocina to Kragujevac, etc., is still not collected or communicated to the public. Some estimates say that this amount could amount to over 400 million euros. The factory in Kragujevac started operating in 2012.
Has any other car factory opened in Serbia in the meantime? For now, it is not, nor is there any indication of such a thing. Therefore, the conclusion is that during this investment there was no transfer of knowledge through the rest of the economy that would lead to new investments that are not supported by subsidies.
The question of auto parts production remains. Fiat’s subcontractors did come to Serbia and produce some parts for cars that are assembled in Kragujevac, but they were also paid with high subsidies and there was no greater involvement of locally produced parts in the production of models that are assembled in Serbia.
Knowledge has been reduced to assembling parts that are not for Fiat
On the other hand, new factories have been opened that produce various parts for the automotive industry in Serbia. But these companies often produce parts that Fiat’s local subcontractors from Serbia do not produce, so it is quite certain that in this case there was no transfer of knowledge.
Another important segment is that these new companies mostly received employment subsidies, while the whole point of knowledge transfer is to increase investments spontaneously, without state support. Another argument in favor of the fact that even in this segment of the industry there was no transfer of knowledge through the economy (and thus to new investments and increased production) is that these new parts factories are not located in a cluster near Fiat or its subcontractors, but spread across the country.
If you produce cables for cars in Prokuplje, it is difficult for you to settle there because you expect to attract workers with that knowledge from Kragujevac. If the newly created knowledge is important to you, you would choose a location closer to where there is that knowledge – which in this case is Kragujevac or its immediate surroundings.
This situation shows us that the situation, even from the point of view of the main economic argument that supports subsidies for foreign investments in Serbia – the transfer of new knowledge – is quite lean. For the time being, it has simply not been shown that in practice there is a transfer of knowledge through the economy initiated by those investments that came to Serbia with the help of subsidies.
Therefore, there is no emergence of new investments and growth of these industries beyond those for which subsidies have been paid. That is why this most important economic argument, which is in favor of the policy of subsidizing foreign investors, is hollow and clearly says that such subsidies should be stopped, BiF reports.
